Rede D’Or São Luiz reported profit of R$419.5 million in the fourth quarter of last year, up 38.5% year over year — Foto: Guilherme Pinto/Agência O Globo
Even after strong consolidation movements in the healthcare industry in recent months, companies maintain the appetite for more deals. Last week, executives from Dasa, Mater Dei and Rede D’Or cited the fact during conference calls. Among the largest recent acquisitions is the purchase of SulAmérica by Rede D’Or, announced in February.
“People talk about a game of musical chairs [in the face of various consolidations]. But we are actually having tectonic plate movements. The sector is changing significantly and quickly,” said Rafael Cardoso Cordeiro, Mater Dei’s chief financial officer.
Mr. Cordeiro did not elaborate, but said that there are still major consolidation moves on the radar. “The Mater Dei network is an important piece. We have been approached and we look for players in our sector. We are important players in the changes that are happening in the sector,” he said.
The company has 2,723 beds in its portfolio, considering recent acquisitions such as Hospital Santa Genoveva and Grupo Porto Dias. Since its debut on the stock exchange, in April 2021, the group has made six purchases – of five hospitals and a data analysis and artificial intelligence company – investing about R$2 billion and increasing twofold its service capacity.
In 2021, Mater Dei reported a record net revenue of R$1 billion, up 43% year over year. Overall, the sector has been supported by the return of elective procedures and drop in spending with Covid-19.
The largest hospital group in the country, Rede D’Or is moving forward to buy SulAmérica, an insurance company that has 4.5 million users of health and dental insurance. According to the terms of the deal, which still lacks regulatory approvals, SulAmérica’s shareholders will receive 13.5% of D’Or, with a premium of 49.3% over the share price on February 18. The purchase will be subjected to a shareholders’ meeting on April 14.
Rede D’Or’s CEO Paulo Moll said that the deal with SulAmérica does not interfere in the company’s plans to continue growing via acquisition. Rede D’Or added 2,213 beds with 17 acquisitions until the first quarter of this year since its IPO. “We don’t change companies’ business models. Most of Rede D’Or’s revenue comes from operators. And in SulAmérica’s case, we obviously see a lot of growth opportunity due to how strong the brand is,” he added.
Otávio Lazcano, chief financial and investor relations officer at Rede D’Or, was optimistic about the future of the business and said that there is room for several synergies, including better use of real estate assets, which can free up cash, and transaction cost reductions between the companies. There are also fiscal and tax efficiencies that the group hopes to capture.
“[We also see] potential reduction in the debt of the expanded company. Rede D’Or has a very long cost of capital and debt term. And SulAmérica is cash positive and will contribute to EBITDA and allow us to reduce net debt,” he said.
The scenario brings strength for the company to accelerate future investments and, according to the executive, opens a window for dividend distribution. He said he was unable to provide monetary estimates for synergies for the time being. The company hopes to have a final verdict on the deal from regulators later this year.
Rede D’Or São Luiz reported profit of R$419.5 million in the fourth quarter of last year, up 38.5% year over year. Between January and December, Rede D’Or’s net income grew 265%, to R$1.67 billion. Net revenue advanced 23.2% in the quarterly comparison, totaling R$5.13 billion.
Dasa, a market leader in medical diagnosis, began its acquisition process in the hospital segment about a year and a half ago and since then has invested about R$2.5 billion in the purchase of nine hospitals. Currently, it has 15 hospital units, which together have 3,500 beds, the second place in the segment behind Rede D’Or.
Dasa’s CFO Felipe Guimarães said the company remains attentive to acquisition opportunities this year, although he argues that the focus for 2022 is to integrate the assets already acquired.
“We believe there are good opportunities to continue consolidations. It tends to be a year in which acquisitions continue, although at a lower level than in 2021,” he said.
On Friday evening, the company unveiled the purchase of Centron – Centro de Tratamento Oncológico, in Rio de Janeiro. In the fourth quarter, the company concluded the acquisition of Hospital da Bahia and São Domingos, which added 679 new beds to its portfolio.
After negotiations last year with BK Brasil — which operates the Burger King and Popeyes chains in the country — fell apart, the Domino’s pizzeria chain is looking inward to accelerate expansion this year. The company plans to open 35 stores this year, with growth especially in the Northeast region and with the attraction of new franchisees.
The strategy comes in line with the most recent investment: in September, the chain opened its second pasta factory in Brazil, in Fortaleza, Ceará. Another focus is to further increase the strength of digital sales, which are expected to receive investments of R$10 million this year. Among the projects are the subscription club, to be launched in the first half of the year.
“The last quarter was a record sales quarter. Now, the first quarter also started quite positive, despite the greater concern of the whole sector with inflation,” Fernando Soares, CEO of Domino’s in Brazil, told Valor.
The Brazilian operation is the fifth largest of the brand in emerging countries and the vision of the U.S. group is that the country has the potential for 1,000 stores, well above the current 327 units, of which 217 are franchisees. Domino’s has more than 18,000 stores around the world.
“The growth potential of the segment dropped after the pandemic. We managed to do well due to our greater exposure to deliveries,” he said, reinforcing the plan to reach 600 stores by 2025, but in “new formats” – with smaller stores, according to him, and even more focus on quality and delivery time.
The company does not reveal the numbers for 2021 but says that sales grew more than 12% in the year. A year earlier, sales had been R$455 million. Mr. Soares adds that the company’s revenue today goes beyond the 700,000 to 800,000 pizzas sold monthly in the country. “Our company is structured in other verticals and each area has a revenue generation, such as the franchising, distribution, engineering and technology fields. When you look at it from this perspective, the post-pandemic company has doubled in size.” The company is the one that negotiates with suppliers and then delivers the ingredients to the units.
High on the executive’s agenda is organic growth. He reveals that the demand has increased since BK Brasil and asset management company Vinci Partners, owner of DP Brasil (which is the master franchisee of Domino’s in the country), announced the end of the acquisition agreement in October.
According to the arrangement, Vinci would keep 16.4% of the shares of BK Brasil, but the deterioration of the shares months later weighed on the deal. The company, however, still has the right to exercise preference, until July, in an eventual new purchase negotiation.
“The failure [of the merger] was very friendly. It was a momentary situation caused by the economy, and the doors remained open. But we have been approached by a lot of other players. Not necessarily a complete merger, but more like ‘can I be with you at that point?’ We are attracting a lot of attention from the market,” he said. BK Brasil declined to comment.
In 2020, the sales of limited-service pizzerias — as this type of self-service and delivery restaurant is called — fell 27%, but rose again 24.8% last year, totaling R$3.48 billion, says Euromonitor. Although the category is still below the pre-pandemic period, Domino’s aims to take advantage of the 8.2% growth outlook for 2022. In an extremely scattered sector, it has numerical superiority: it controls 17.3% of the market, followed by Pizza Hut, with 7%, and Patroni, with 6%.
For this, the focus is on the control and analysis of data from the most diverse distribution channels, such as the apps, websites, WhatsApp and telephone, whose service was transferred in 2021 to a call center and the processes were digitalized. According to the executive, the service time worsened, but the ticket grew 30%. Today, 65% of orders are born in digital channels, but the ambition is to exceed 72% still in 2022.
The flow of foreign capital to Brazil will be sustained in the medium term and there will be a new phase of investments towards fixed income assets, said Ricardo Mora, a partner and co-head of Latin America at Goldman Sachs. The American executive of Mexican descent spoke to Valor while in Brazil, his first interview with a local news outlet. Among his functions as the chief executive of the bank in the region, Mr. Mora oversees the executive committee formed by the five co-CEOs of the Brazilian operation.
With more than 30 years of experience in emerging markets, Mr. Mora sees the flow of foreign investment associated with the monetary tightening carried out by the Central Bank as anchors for the Brazilian currency. “When you have tighter monetary conditions, which allow for the interest rate differential to provide the anchor for the currency, you have portfolio flows that will continue to come into this country,” he said.
The current flow of funds has been “mostly geared towards equity,” the executive said, who believes there will be a new phase of this capital inflow directed to fixed income, which “will anchor the [Brazilian] currency.”
Read the main excerpts from the interview below.
Valor:We see a strong inflow of funds from abroad to the stock exchange. Is Brazil cheap for foreign capital?
Ricardo Mora: When you look at the broader environment or what’s going on in the markets, the perception of cheap can vary. And when you look at currency fluctuations in association with valuations, then what’s perceived to be expensive could be cheaper, from the dollar perspective. And so what’s happened in terms of Brazil specifically is we’ve had from our estimates, there’s been roughly about R$86 billion of foreign inflows. And that’s been mainly geared towards the equity markets. And so you’ve seen the commensurate appreciation of the foreign exchange [rate]. And so roughly R$80 billion have been equities. The remainder have been directed to fixed income, as a result of the CDI [Brazil’s interbank benchmark rate] being higher. From the equity portfolio flows that we’ve seen all these have been in the secondary market, mainly into the commodity space, banks and index. But we have not seen the money come into institutions that serve the local population, in the retail space. We haven’t seen it [inflows], for example, in fields that you would think would be more consumer led, it’s really been more focused on commodities and banks.
Valor:Is this inflow sustainable in the medium term?
Mr. Mora: It’s a good question. The economic engine in Brazil is strong. There will be continued inflows into Brazil, it’s not a matter of whether there’ll be some fits and starts in terms of valuations versus other countries. But in terms of how foreign investors see the country and its economic might, it’s very clear that you can see it in many different avenues. We have just discussed fixed income and equities, but we also look at foreign direct investment. And, through our global network, we’re in touch with sovereign wealth funds, high net worth individuals, family offices, and all have intentions to invest in Brazil.
Valor:About the Brazilian real, do you see the exchange rate back into the fundamentals?
Mr. Mora: From the perspective of Goldman Sachs, there was an overshooting of the currency in terms of depreciation. What we’re doing is more reverting back to the mean. More importantly, the inflows have helped, certainly, but the policies help as well. When you have tighter monetary conditions, which allow for the interest rate differential to provide the anchor for the currency, you have portfolio flows that will continue to come into this country now. So far, as we discuss, it’s been mostly geared towards equity, and I think the next leg will be fixed income flows. And a stable currency in the backdrop of a robust economy will then allow for continued fixed income flows. That will be the next leg, which then will anchor the currency.
Valor:Do you see the exchange rate below R$5 to the dollar after the elections, in October?
Mr. Mora: I wouldn’t be surprised if we go below that. And it’s a function of the sustainability [of debt]. And that will come down to government policy, fiscal, in the backdrop of what’s happening with the continued drop of inflation as a result of the Central Bank’s hikes. And so in that backdrop, you don’t have for example an overheating economy. There is a certain slack in the economy that will allow it to grow. And so in that backdrop, now, this comes down to the ability for continued growth. And that depends again on fiscal policy and a well-anchored currency.
Valor:Is there a risk of reversal of the inflow to the emerging markets if the Fed hikes interest rates more aggressively?
Mr. Mora: In terms of foreign inflows and broader markets, it’s difficult to gauge where capital flow will go. One thing is certain: in the backdrop of market volatility, investors tend to be less risk averse and to look for value. And they tend to look for assets where there’s strong underlying enterprise value. It’s already well known that there will be at least seven rate hikes in the U.S. If you look at the FCI [financial conditions index], it’s already tightened quite substantially, and the market has been pricing these tighter monetary conditions. From a valuation perspective, you can argue that Brazil is fundamentally strong in value. That’s why we’ve seen these commensurate flows.
Valor:Brazil started raising rates before the Fed. Can this help cushion the impact of interest rate hikes in the United States?
Mr. Mora: The Brazilian central bank was one of the first to move. And they were very early to the recognition that the word “transitory” was a bit of a difficult concept to describe the condition [of inflation] given the backdrop of rising prices. The Brazilian central bank has been quite aggressive and not just moving in small increments of 25 basis points. One sees they are very serious about [monetary] policy. In that backdrop, you’ve seen the currency react. This year, it’s been the combination of central bank policy and foreign inflows. And the Central Bank reacted appropriately. It’s widely recognized that this Central Bank had to react to what was happening on the ground with Covid. And when there was a recognition that inflationary pressures were building, again, reacted very quickly. When you look at the broader emerging markets, there have been certain countries that have been resistant to move as actively as the Brazilian central bank. And that’ll bode very well, in terms of future policy and the ability for foreign investors to know that the central bank and its policy will be reactive [against inflation] as needed, that there’s an independence of the central bank, that they will do what’s right.
Valor:Will the war in Ukraine affect the flow to Brazil?
Mr. Mora: When you look at emerging markets, it used to trade as a beta of one, meaning that if you had a problem in one market, it would affect the others. And now, what you have is a more of a focused view, in terms of recognizing that risks can be isolated, and that portfolio and capital flows will be affected in specific manners. The market now sees that there’s actually very independent and very specific regional differences between these countries and policies. In Brazil, for example, we did see certain portfolio flows leaving Eastern Europe, including Russia, and flowing into Latin America, specifically into Brazil. And so from that perspective, there was some shift in the portfolio flows more geared towards equities as you’ve had these tremendous growth and valuations in developed countries, specifically in the U.S. Of course, most of the capital that has been directed to the U.S. has done very well. It’s hard to take that money away from that performance, and spin it into another jurisdiction. That said, as the macro backdrop has become a bit more challenging in developed markets, we’ve seen these portfolio flows. Brazil, specifically, has very attractive valuations, and it also has the right components of what the world needs, like commodities. In that backdrop, it seems to me very clear that there’ll be continued interest in terms of portfolio flows, either in the private markets or as outright cross border flows.
Valor:Does Goldman see the sustainability-linked bonds as an opportunity in Brazil?
Mr. Mora: We have seen many new, modern operations in Brazil and we see many opportunities in the sustainable bond market. There are new concepts, like carbon credits, debt for nature swaps, the concept of being able to monetize what is already in Brazil in terms of [conserved] nature, for example, the ability to have carbon capture associated with Brazil’s [environmental actions]. Goldman has had a tremendous focus in terms of being able to help our clients that have access to these resources and to monetize them. I think you’re going to continue to see very innovative products around this space. That’s a very good thing in terms of outlook, because monetization means more preservation.
Valor:What are Goldman’s plans for Brazil and Latin America?
Mr. Mora: In Latin America, I would say that in the last two years we’ve had successive record years in the region across divisions. When you look at Latin America, Brazil is core to our focus in terms of our aspirations for the region. And when I specifically look at what’s happening here, and what we’d like to do, one is clearly investing in our people. There’s been a number of initiatives taking place here. For example, we’ve been very active in our hiring in the tech space. We hired 40 engineers last year, and our intention is to hire another 20 this year. Under the Brazil Management Committee, we’ve been able to progress our plans in Brazil.
Suzano, the largest producer of eucalyptus pulp in the world, plans to enter new markets of $115 billion a year that are likely to grow in tandem with the decarbonization agenda. The company says its transformation project toward the bioeconomy remains firm and cited four fronts: textile, carbon, bio-oil and microfibrillated cellulose.
“We will continue delivering results in the short term. But we have to look to the future, to think on how we will operate to transform the company and the society”, said on Wednesday CEO Walter Schalka.
Some of the new businesses are in the process of becoming operational. The company has already submitted for certification 7,5 million tonnes of carbon equivalent — from a total of 30 million tonnes that can be exploited — and these credits will be traded on the voluntary market, said the director of New Business, Strategy, IT, Digital and Communication of Suzano, Christian Orglmeister.
In addition, the first textile fiber plant from microfibrillated cellulose in partnership with Finland’s Spinnova starts production at the end of the year — this market alone is estimated at $70 billion.
Some of these businesses are on the verge of becoming operational: the company may soon trade 7.5 million tonnes of carbon equivalent in the voluntary market, and the company’s first textile fiber mill in partnership with Finland’s Spinnova will start production at the end of the year.
Marcelo Bacci, Suzano’s chief financial, investor relations and legal officer, said that the reduction of the company’s disbursements to R$1,500 per tonne by 2027, considering investments and production costs, will increase free cash flow generation by R$2.3 billion a year. In 2021, these disbursements totaled R$1.669 per tonne.
The Cerrado project, which foresees the installation of a pulp mill with a production capacity of 2.55 million tonnes per year in Ribas do Rio Pardo (Mato Groso do Sul), will contribute to these gains, since it will have the lowest cash production cost in the world.
The new pulp plant under construction in the interior of São Paulo will bring greater energy efficiency and reduce the pulp cash cost by R$115 per tonne, which means an impact of R$12 per tonne on the company’s cash cost.
“The project will have high energy efficiency, allowing for a 64% growth in energy generation per tonne produced,” said Aires Galhardo, Suzano’s head of pulp operations.
The company currently generates 0.14 megawatt per tonne and will reach 0.23 MW per tonne when the project is operational, as it will generate 0.63 MW per tonne.
The global demand for hardwood pulp will continue to grow over the next few years, driven mainly by the tissue, packaging and specialty paper segments, said Leonardo Grimaldi, the company’s head of commercial pulp, people and management.
The company estimates that the global consumption of hardwood will organically increase by 4.7 million tonnes in the next five years, to 41.1 million tonnes in 2026.
But the prevailing assessment is that this increase can be higher considering two major trends: the replacement of other fibers for hardwood pulp and the migration of plastic to materials from renewable sources, potentially expanding the consumption of the raw material to 43.1 million tonnes in 2026.
On the supply side, considering the projects already unveiled, the expanding capacity including closures and conversions may reach 6.9 million tonnes in the period.
However, supply disruption has occurred more and more frequently and is expected to reduce the additional volume of fiber in the market in the coming years, the executive said. Historically, 700,000 tonnes produced in older mills leave the market each year. This volume reached 2 million tonnes in the 2020-2021 period, he added.
In this scenario, the operation rate of the global industry would be 91% in 2026, compared with 90% in 2021, Mr. Grimaldi said.
Suzano will continue to grow on the tissue paper market and this expansion can be organic, through investments on new projects, or via acquisition, Luís Bueno, the company’s head of consumer goods and corporative relations, said recently.
The executive recalled that there is much room for expanding the demand for tissue in Brazil, given the low per capita consumption index in relation to other markets. Last year, the company operated at 100% capacity in tissue.
Suzano entered this market in 2018 with an initial focus on the North and Northeast regions, where it is already the leader with 66% and 28% shares, respectively. After advancing into the Central-West and Southeast regions, it ended 2021 as the third largest player in this market, with a share of 11.2%.
Renault’s factory in São José dos Pinhais (state of Paraná) stopped 41 days throughout 2021 because of semiconductors shortage. For the same reason, between Monday and Friday the unit’s line work will be interrupted again. To the impossibility of working at full speed, which has become routine in the automotive industry, is added, currently, a strong pressure of costs. Despite the challenging environment, Renault’s global management is about to announce the value of a new investment plan, necessary to develop and produce, in Brazil, a future family of vehicles.
A little less than a month ago, the automaker announced that the Brazilian plant would be prepared to produce a new vehicle platform. This platform will serve as the basis for different new models. It is an important renovation, for several reasons. It is the first major change in platforms for the brand since 2007.
In addition, this new base also bears the signature of the Renault-Nissan-Mitsubishi alliance, which for more than one occasion seemed doomed to failure. The initiative also provides an opportunity for Brazil to be included in the transportation transformation process, since the new platform will also be used to produce electric cars.
The size of the new investment has yet to be defined. But, according to the CEO of Renault Brazil, Ricardo Gondo, the plan is bold. Besides the new platform, it includes a new engine. Therefore, it will require a large amount.
The executive is optimistic about the willingness of the parent company to invest in Brazil. A year ago, the company seemed more hesitant. In March 2021 an investment plan shorter than usual was announced – covering the period between 2021 and 2022 and totaling R$1.1 billion; resources already practically all used in the modernization of products already known.
Despite the plans for an electrification-oriented platform, for Mr. Gondo the production of 100% electric cars in Brazil will still take a long time. “Unlike Europe and the United States, this type of vehicle is still expensive for the Brazilian consumer in general,” he says. The executive recalls that the European consumer also receives tax incentives from governments to exchange the car for an electric model.
Even so, Renault intends to be recognized by the Brazilian public for the electrification of its line. In addition to the two 100% electric models already sold in the country – the Zoe compact model and the Kangoo SUV – next week, the company will introduce the Kwid compact SUV in an electric version. In Brazil, the 100% electric cars are all imported.
The French automaker is also studying the return of the Megàne to Brazil – the name is the same as one of the first models sold by the company in the country, but the Megàne that has just been launched in Europe is different. It has a pickup body and an electric engine.
Despite the high prices of electric cars serving, for now, a niche of the Brazilian market, Renault has plans, in the future, to popularize this type of model through sharing services. The mode is part of Mobilize, a company of the group launched in Brazil in the middle of last year. Sharing and long-term rental are among the new products offered by Mobilize and have helped to increase the company’s revenues.
Renault’s electric vehicles also continue to run on Fernando de Noronha. The project, part of the archipelago’s decarbonization plan, began three years ago. With the delivery of ten more vehicles a few days ago, the electric fleet in Noronha now totals 46 units. In a partnership with Neoenergia, the project includes solar panels for the installation of two clean energy plants.
“Renault was one of the first to enter electric mobility,” says Mr. Gondo, a mechanical engineer who, before taking over the automaker’s command in Brazil three years ago, held different positions in the local operation and also in Europe. According to him, there is no prediction when the supply of components will be resumed. Meanwhile, he says, the brand is working to establish its identity.
Electrification is the group’s global focus. In January, the Renault-Nissan-Mitsubishi alliance announced a $25.8 billion investment program over the next five years focused entirely on electric cars.
The weakening of globalization intensified by the war in Ukraine opens a good chance for Brazil to reduce its economic isolation and connect to global production chains for goods and services. But the opportunity will be lost without opening the economy and comprehensive economic reforms that make Brazil more attractive to international companies.
The thesis that the conflict in Eastern Europe opens a “once-in-a-century opportunity” for Brazil was recently raised by Central Bank President Roberto Campos Neto in an event at public spending watchdog TCU. “Brazil has not inserted itself into global chains,” he said. “Now it has an opportunity with the redivision of global chains.”
For geopolitical reasons, the United States and Western Europe would be interested in reducing their dependence on inputs and products not only from Russia, but also from China. Brazil, at least in theory, could benefit, both because of its geographical proximity and because of shared values, such as democracy. Mr. Campos Neto says that, for this to materialize, the country must be “in the right place, with the right policies.”
Experts told Valor that, in reality, the war is a new chapter in the process of “corrosion of globalization,” as defined by economist Adam Posen, from the Peterson Institute, a Washington-based research organization.
“The deglobalization process is not new,” said Lia Valls, an associate researcher at Fundação Getulio Vargas (Ibre/FGV) and a senior fellow at Cebri, a center for studies on international relations. This trend emerged after the 2008 global financial crisis, which hit the working class in the United States, leading it to question the income inequality caused by globalization.
Since then, there have been several attacks on world economic integration, from Brexit to China’s five-year plan focused on the industry to dominate the high value production chains, from U.S. President Donald Trump’s retaliations against the Asian country to the foreign policy of his successor, Joe Biden, aimed at reindustrializing the U.S.
The pandemic intensified this trend, with the restrictions that several countries imposed on exports of health products and equipment. It also led to disruption in global value chains, such as chips and electronic goods, encouraging companies to rethink supply chains and prioritize secure access to inputs over costs and productivity.
In the war, the problem impacts mostly energy, food and minerals supplied to the world by Russia and Ukraine. But the case raises more general concerns about the risk of disruption in the supply of inputs and final products due to geopolitical risks.
“The U.S. and the European Union will not be the ones to guide the revision of global value chains. These are decisions made by the companies themselves,” said Carlos Pio, a professor of international political economy at the University of Brasília and a former executive-secretary of Brazil’s Foreign Trade Chamber, known as Camex.
In the companies’ decisions about where to produce each input used in the value chain, it matters a lot if the country has an open economy, which reduces costs to move products and capital, and if the business environment in general is competitive. “What the Brazilian government can do to better position the economy as a whole is having a pro-market reform agenda,” Mr. Pio said. He is in favor of a unilateral opening of the economy, since the negotiation of trade agreements with other countries generates slow results and our level of protection is high, according to him.
A criterion widely used to measure the level of integration of an economy into global value chains is the share of imported components in exports of industrial goods. In the case of Brazil, this indicator is at 14%, well below Mexico, with 38.4%, according to data compiled by the World Bank.
In a 2020 report on global value chains, the World Bank highlights some government decisions that have hindered integration into global chains. One is the Inovar-Auto program, put in place during the Rousseff administration, which protected the industry and required a high percentage of local content, causing the industry to stop focusing local production on exports.
But integration into global chains has not made any tangible progress during the Bolsonaro administration despite the pro-market economic view. Economy Minister Paulo Guedes has been criticized for his strategy for trade. He has been publicly arguing for a plan to first give equal competitiveness to companies, with the approval of a tax overhaul, and only then substantially lower import tariffs.
Mr. Pio, who was part of Mr. Guedes’s team until July, believes that the Bolsonaro administration has moved in the direction of trade opening by cutting tariffs, although he considers that this process must be accelerated.
Ms. Valls ponders that Brazil’s disconnection from global value chains, although true, has some nuances. First, Brazil is not outside all chains, but rather of some of the most valuable ones. In the case of food, for example, Brazil has a large footprint. And there are some cases where the country is a major player in a high value chain, she said, citing planemaker Embraer.
Brazil has a greater integration, according to data compiled by the World Bank, as a supplier of inputs for industrial exports from other countries. In this case, the percentage is 17.7%, reflecting the export of basic products used in industrial processes in other economies.
Comparisons of international indicators of participation in production chains can show some distortions. Small countries, such as Chile, have few alternatives other than integrating into trade.
“Our internal market is large, and multinational companies historically come to Brazil to take advantage of it,” Ms. Valls said. The question mark is how to get companies to look beyond the domestic market. The geopolitical environment favorable to the relocation of global value chains is not enough. “If you don’t have the conditions of attractiveness, companies will not come.” This includes commercial issues, such as tariffs trade agreements with other economies, but also factors such as macroeconomic stability, clear and stable rules, infrastructure and quality of human capital.
The Ibre/FGV researcher ponders, on the other hand, that Brazil’s greater connection with global chains is not a panacea, which would bring only gains or solve all development problems. “The discussion over the search for productivity has no end,” she said. “If I want to avoid the so-called middle-income trap, I have to invest in development, human capital.”
It is also necessary to ensure that the gains from globalization are not captured only by companies and, therefore, are also shared with consumers. Another concern is to avoid that, in this process of integration into global chains, standards like the preservation of the environment are loosened.
The current scenario of fiercer competition between brands, following the drop in consumer disposable income, has made the industry spend more to try to improve its sales. Amounts paid by companies to retail chains, or negotiations involving discounts on invoices, lost strength in the first year of the pandemic, but accelerated again at levels above those of the last five years.
According to a survey conducted by Valor based on the financial statements of eight major chains that publish these figures, over R$2 billion in commercial funds were paid by manufacturers to retailers in 2021, a rise of 11.6% over 2020. For comparison, this expansion rate is more than double the average annual growth of 5.7% seen since 2016.
According to calculations, there was a 3.4% drop in the total amount in 2020 compared to 2019. When the health crisis began two years ago, the payment of emergency aid by the government supported the accelerated demand in consumption, and without the need for companies to support much more aggressive actions, some payments lost strength – a different picture from today.
The information was collected from the footnotes and/or financial reports released by GPA, Assaí, Carrefour (including Atacadão), Americanas, Magazine Luiza, Raia Drogasil and Panvel. Among all the companies, in two there is practically stability (GPA and RD) and in only one, Americanas, there is a drop, of 9.5%, in the amount.
There are companies that do not inform these numbers in their reports, such as Via and Grupo Mateus – the publication is not mandatory, according to Brazilian accounting standards. The industry does not usually inform this data in their earnings reports (Whirlpool, Ambev and M.Dias Branco, for example, do not disclose the information), so the best barometer is the retail market. Adding up all the chains, the expansion in disbursements is in line with the increase in total gross revenue in 2021 (11%).
According to consultants who work with the networks, these negotiations accelerated as of 2021, in a movement that has been extended through 2022, with a focus on increasing sales by commercialized volume. In 2021, much of the increase in revenue came from rising inflation, and not from volume (which even shrank in certain products).
“In the good years, companies take their foot off the gas in terms of funds. That’s not to say that retailers won’t continue to negotiate this with industry, but the commercial stimulus drops. But everything indicates that 2022 will be a year of more bumps, and with retailers feeling more pressure on cash, the need for these agreements on the store side increases,” says Eugenio Foganholo, head of consulting firm Mixxer.
“What happened in 2020 was a disruption of products, with the crisis of the supply chains in the pandemic,” says the chairman of the board of a retailer in São Paulo. “There was a shortage of merchandise, from cell phones to furniture, and no one had to beat a drum to sell. Part of 2021 wasn’t bad either, and that made the funding for actions in TV disappear. But if you look now, there are even wholesalers advertising meat and beer offerings in prime time. And the industry is the one who pays for part of this, under the cooperative advertising agreement.”
These negotiations involve marketing funds (support for campaigns in newspapers, on TVs), or in shelf exposure (who pays more has better space). There are still bonuses associated with industry purchase and customer sales targets, and freight reimbursements. If the chain exceeds the goal, a bonus is paid. And the payment can be made through the reduction of invoices payable to the industry.
Store openings are still part of the negotiations, although they do not involve such significant amounts, through the free delivery of initial batches of products to new stores. Openings receive greater funds than refurbished stores – last year, openings and conversions grew more than in 2020. Between openings and closings, the balance was positive in 204,000 stores, and in 2020 there were 75,000 closings. For 2022, the projection is for a new positive balance.
Among the cases analyzed, Carrefour (whose largest business is Atacadão), Dimed (Panvel) and Assaí lead the increase in payments, with expansion of 32%, 22% and 18%, respectively, in 2021 versus 2020. Carrefour integrated at the time the Makro chain to its store base, absorbing new contracts. The chain and Assaí have resumed openings since 2021.
Consultants also point out two aspects in these negotiations: the pressure that the industry itself faces in its expenses and the effect of high inflation in these trade agreements. Manoel Araujo, head of Martinez de Araujo Consultoria de Varejo, remembers yet another aspect. “I have five brands of a certain product in the store, and I signal that I will look for other cheaper brands in the market. I can still use the store’s own brand, which fits like a glove in these times of crisis. This all ends up entering the daily negotiation of discounts,” he says.
Despite the fact that, strategically, these negotiations are fundamental in the sector. Brazilian accounting rules do not require the disclosure of those numbers in the footnotes or in the earnings reports. And the subject has already been the target of fraud in the sector years ago.
There are chains and industries that only mention in the footnotes the existence of commercial agreements, and others that specify them in the “accounts receivable” or “suppliers” lines. The amount is also credited as a type of credit of the cost of the goods purchased.
Audit reports on chains’s financial statements often cite the bonuses as a “significant” issue that merits exchange of information with management for further clarification but conclude that the handling of the issue in statements is “acceptable”. In 2003, Dutch retailer Royal Ahold admitted that its profits were inflated by $500 million between 2001 and 2002 because of the inclusion of bonuses that never existed.
The sale of the chemical industry Oxiteno — which belonged to Ultra group — to Indorama — leader in the Brazilian PET resin market — was concluded on Friday for $1.48 billion. This way, Indorama Ventures Public Company Limited (IVL) reached the top of the ranking among the ethylene oxide and surfactants producers in the Americas.
With annual sales of around $15 billion, not considering the most recent acquisition, the Thai company incorporated the company, a reference in innovation in the Brazilian chemical industry, in its integrated oxides and products division (IOD), with a strong portfolio complementarity. The synergies are estimated at $100 million.
Ahead of Oxiteno for the last 15 years, the executive João Parolin assumes the position of CEO of IVL’s IOD business for South America. All the company’s management is being repositioned in the new structure. “Oxiteno has a portfolio more focused on specialties and surfactants and accelerates Indorama’s innovation journey,” the executive told Valor. “It is an opportunity for portfolio enrichment.”
Oxiteno has a relevant presence in the agribusiness, personal and home care, paints and varnishes and oil and gas markets and operates 11 plants — 7 in South America and 4 in North America. The deal adds a new geography for the Thai group’s IOD division, which was already in North America, with ethylene oxide and surfactant production in the United States, but did not yet have operations in South America.
In Mr. Parolin’s evaluation, the incorporation by Indorama will strengthen Oxiteno, put up for sale by Ultrapar after reviewing its portfolio of assets. “It was a good solution”, he said. The Ultra group, which is also leaving pharmaceutical retail with the sale of Extrafarma to Pague Menos, plans to focus on power and infrastructure, keeping under its umbrella the fuel distributor Ipiranga, Ultracargo (storage of bulk liquids) and Ultragaz, distributor of liquefied petroleum gas (LPG).
Last year, Oxiteno traded 779,000 tonnes of specialty chemicals and commodities, up 3% compared to 2020. Net revenue jumped 36%, to R$7.1 billion, and Ebitda reached R$1.1 billion, the highest in its history.
According to Dilip Kumar Agarwal, CEO of IVL, the acquisition is in line with the group’s ongoing goal of doubling Ebitda every five years. “Based on our experience of completing about 50 acquisitions in 20 years, the quality of Oxiteno’s people and our shared values were important considerations,” he said in a statement. The group has three major business divisions: PET, polyester fibers and textiles, and IOD.
The transaction implies EV/Ebitda multiple of 6.3 times, considering the results for 2021. Indorama paid $1.33 billion to Ultra on Friday and another $150 million in April 2024. The final price exceeds the initially agreed total amount of $1.3 billion but is still subject to adjustments.
The successful auction of the Companhia Docas do Espírito Santo (Codesa) may boost the other port privatization projects underway. However, market players are skeptical about the feasibility of getting them off the ground by 2022, especially the privatization of the Port of Santos — a much more complex project from a technical and political point of view.
The concessions for the ports of São Sebastião (São Paulo) and Itajaí (Santa Catarina) are smaller and simpler. That is why holding these auctions this year is seen as more likely, although there are also challenges.
The privatization of Santos is a priority for the federal government. The public consultation stage of the project ended last week, and the government plans to publish the public notice in November in order to hold the auction later this year. Any contract would be signed next year.
The auction model will be similar to that of Codesa. Santos Port Authority (SPA) will be privatized, and the administration of the port will be granted for a period of 35 years — R$1.4 billion will be spent on construction and R$14.16 billion on maintenance, mainly dredging. In addition, the winner will have to allocate R$3 billion to make the Santos-Guarujá underwater tunnel feasible — its construction and operation will be tendered separately.
The project has been the target of much interest from the private sector, but the perception of risk is also high. “There are many groups studying it, but it will be important that the government gives a reasonable time for the companies to study the final tender, because there are many risks involved. It is a complex port, which encompasses multiple interests, has many terminal contracts in effect, and the auction will have heavy investment obligations,” said Rodrigo Paiva, a partner at consultancy Mind-Infra.
For Thiago Miller, a partner at law firm RMM Advogados, “it is very unlikely” that the auction will take place this year. “The big determining factor of the schedule will be the analysis of the [public spending watchdog] TCU,” he said.
The disbelief about the viability of bidding for the port on time is shared by at least three other sources that follow the matter closely.
The government, however, guarantees that there is enough time to hold the auction in 2022. Fábio Abrahão, the head of Concessions and Privatizations of the Brazilian Development Bank (BNDES), said that the team will seek to hasten the project as much as possible to try and sign the contract this year — in the market, the evaluation is that leaving the act for 2023, in the next administration, creates an additional risk to the conclusion of the process.
“Privatization today is different from what it was in the 1990s. We no longer have that resistance from the population. In Santos, there are multi-billion investment obligations foreseen, the entire productive sector is convinced that it is necessary, and the companies have already understood the rules of protection [to current contracts]. It would be an uneconomical decision [not to hold the auction],” Mr. Abrahão, who oversees the structuring of the project, said.
The Codesa auction was the first privatization of a port authority in the country. The Brazilian port sector is already used to private or leased terminals, but the port authorities — responsible for the management and development of the common areas of the ports – are still state-owned and, historically, have been the target of partisan nominations and political interference.
Besides Codesa and Santos, the federal government has structured a portfolio of projects in the segment. “We are creating a new market,” Mr. Abrahão said.
The projects for the ports of São Sebastião and Itajaí, also planned for this year, follow a different model: there will be no privatization, only the concession of the ports. In addition, the new operator will have the right to explore not only the common structure, but also terminals — in the case of Codesa and Santos, on the contrary, there are restrictions on the participation of terminals in the auction, to avoid conflicts of interest.
The format was chosen because they are small ports with specific vocation and, therefore, there would be no feasibility for a concession only of the common areas.
Today, the port of São Sebastião basically handles soda ash, an input imported by the glass and soap industries, and is home to a Petrobras private terminal.
Considered challenging from an economic point of view, the project does not foresee minimum investments. The idea is that the new operator, once it takes over, has the freedom to choose the interventions. “The expected revenue is lower, but so are the expenses. There is less profitability and fewer problems, unlike Santos. It can attract niche markets,” Mr. Schwind said.
For Mr. Miller, there are two major challenges for the expansion of the operation in São Sebastião. The first is the need to build a second pier, further out to sea, to obtain more depth. The second is the lack of a land access to the port, something that will depend on the state.
The Port of Itajaí is geared towards container handling. The plan is to attract large shipping groups from the sector. However, it is also a complex project, with a high volume of investment (R$2.8 billion) and operational challenges. “It would be important to mitigate some very big risks in the public notice. Among the obligations, there is expropriation and purchase of private areas, which are not simple. For a private-sector group, it is a very difficult risk to assess,” Mr. Paiva said. Even so, he believes that the auction can be successful.
The Brazilian Development Bank has already started studies for the privatization of the Companhia das Docas do Estado da Bahia (Codeba), which is likely to follow a model similar to that of Santos and Codesa, but the process is just beginning. Besides this, the bank is negotiating to expand its portfolio, with projects that would be left for the next administration. “In the very short term it is estimated that other ports will enter. It would be natural to have Rio de Janeiro, and Pará would also be a good candidate to join the program,” Mr. Abrahão said.
Brazilian Central Bank increased the renminbi share in its foreign exchange reserves — Foto: Tomohiro Ohsumi/Bloomberg
Faced with rising inflationary pressure and monetary tightening in major economies, the Brazilian Central Bank increased the renminbi share in its foreign exchange reserves to 4.99% in 2021, the highest since the Chinese currency became part of the basket in 2019.
The share is four times higher than the previous year’s allocation, of 1.21%. The increase represented, in nominal terms, $13.766 billion more in assets measured in renminbi. At the same time, the representation of the U.S. dollar fell 5.69 percentage points over 2020 and stood at 80.34% in the period, the lowest since 2014. The drop is equivalent to $15.276 billion.
The share of the euro dropped as well, to 5.04% in 2021 from 7.85% in 2020, a reduction of $9.691 billion. The Central Bank did not elaborate on why it decided to reduce investments in the greenback. Yet, with high inflation and the prospect of interest rates being raised by the U.S. Federal Reserve, the prices of the main asset in the reserves (U.S. Treasury bonds) are likely to fall. In addition, inflationary pressure has also risen in the euro zone, generating the same effect on European securities.
There is even greater incentive to invest in renminbi after the United States blocked Russian investments in dollars. As a result, some economists argue that the Chinese currency is likely to gain prominence in the countries’ forex reserves.
In the report, however, the Brazilian Central Bank refers only to the profitability of currencies. According to the monetary authority, assets in renminbi have higher yields than those in dollars, although they have the same risk as the total curve of U.S. securities.
The Central Bank has also increased the share invested in sterling, to 3.47% in 2021 from 2.02% in 2020, as the United Kingdom is further ahead in the process of monetary tightening. The position in gold, another typical hedge against inflation, increased to 2.25% from 1.19%.
The monetary authority has also resumed investments in Canadian and Australian dollars in 2021. These investments were reduced to zero a few years ago because these currencies have a high correlation with the real, since they are from commodity-producing countries and have also been used by investors as a protection against inflationary risks.
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